Earlier this year, the European Commission set out details for the forthcoming . The taxonomy aims to create “a common classification system for sustainable economic activities” that will help “direct investments towards sustainable projects and activities.” After significant debate between member states, the commission put natural gas and nuclear power on its list of green energy sources worthy of attracting private capital.
Countries including Luxembourg, Germany and Austria the low threshold for natural gas emissions and vehemently opposed the inclusion of nuclear power. Prior to the publication of the , Luxembourg’s government it could take legal action to block the move. France and Finland have been strongly in favour of nuclear power’s inclusion.
Best of intentions
Investment industry professionals that Delano spoke with offered contrasting reviews.
According to Rick Lacaille, senior investment advisor at the custody bank and financial data provider State Street, the objective of the taxonomy is two-fold. First is “a sense of consumer protection, in other words, that when people buy something, they know what’s inside.” While there has been “the best of intentions” with various labels and standards, “there’s been a lot of inconsistency” and so “there’s potential for people to be misled with what they’re buying.” Clear definitions could lead to better investor protection, one could argue.
The second aim is “channeling capital into areas that are needed, in order to achieve a more sustainable economy,” Lacaille said. “The taxonomy is seeking to do that by constraining capital into areas that are harmful in favour of others.” Despite disagreements over the standards, “the rules of the game” for fund firms are at least clear across the entire European marketplace.
Nuclear and gas ‘weaken’ taxonomy
Regardless of this clarity, many in the financial sector remain staunchly opposed to the inclusion of nuclear and gas. “The commission’s decision on the EU taxonomy to classify investments in nuclear power and fossil gas as sustainable weakens the acceptance and credibility of the taxonomy and thus the desired steering of money flows into sustainable economic activities,” stated Dennis Hänsel, global head of ESG advisory at DWS Group, a German fund firm spun out of Deutsche Bank in 2018, with €928bn in assets under management. “This decision to put nuclear energy on the same level as energy generation from wind and solar clearly contradicts the assessments of our customers and sets two negative incentives: investments in a risk technology--safety problems of nuclear power plants and final disposal of nuclear waste--and projects with high greenhouse gas emissions--gas power plants--are financed by sustainable funds. Transition solutions until 2030 for gas-fired power plants and 2045 for nuclear power plants reduce the possibilities to work consistently on the development of power generation by renewable energies. The inclusion of nuclear power and fossil gas in the EU taxonomy not only contradicts its main idea but undermines disclosure under .”
“The non-inclusion of nuclear and gas in the taxonomy would not stop investments into new gas or nuclear facilities, it would simply mean that the EU doesn’t consider investments in this infrastructure is fully aligned with the EU’s goals” to cut greenhouse emissions and keep global warming under 1.5C degrees, conceded Mirjam Wolfrum, director of policy engagement at CDP Europe. The NGO, formerly known as the Carbon Disclosure Project, runs an environmental disclosure system. It works “with more than 590 investors with over $110 trillion in assets” to pressure investee companies to participate in the disclosure platform. But its inclusion is harmful, she said. “I would say the inclusion of nuclear and gas energy now in the taxonomy means that financial actors definitely risk falling short of meeting the Paris goals.”
The case for gas and for flexibility on nuclear
Lacaille said the argument for including gas “is a simple one. The investment case is very clear,” if gas “reduces coal more rapidly”.
Natural gas as a transition source of energy is not particularly controversial, reckoned Bruno Allain, senior research analyst at Quaero Capital, a European asset manager using “a range of high conviction investment strategies,” with €2.87bn in assets under management. “The subject is more complex with nuclear power, which is a low-carbon energy, no one disputes this, but” low-carbon energy does not automatically mean green energy, said Allain. “Nuclear plays a certain role” in a net-zero trajectory. “It’s a fascinating debate. It’s really good that the taxonomy opened it.” But Quaero Capital’s funds will not “be more exposed to nuclear power in the future.”
Nuclear is trickier than gas, Lacaille agreed, but he called for a certain level of first. “It’s very tough to make nuclear investable without some degree of liability protection, and that’s pretty tough. But we also know that nuclear is not standing still, either from an economic perspective or from a technology perspective. There are clearly very big concerns about environmental risks, [but] those risks are changing as technology changes as well. So I think our viewpoint [is that] a viewpoint on nuclear shouldn’t be set in stone. We should keep thinking and looking at how it could improve, what the objective is, and what the impacts of nuclear are. And if we take the sort of national dimension out of that discussion, it will be highly beneficial and get us focused on the investment and the scientific facts.”
As for the continuing unpopularity of nuclear power in countries like Luxembourg and Germany, “I’d be the first to admit when you when you have it on the doorstep, and you’ve seen some of the risks, then it’s pretty challenging. But it’s another obvious point that you can stop things in your own territory, but it may not be effective in reducing risk if it [is still] nearby. That’s not just about nuclear, it’s about everything else.”
Room for improvement
Beyond the question of nuclear and gas, many in the financial sector have found other faults in the rulebook. “Our starting point is that we think the taxonomy is a helpful guiding framework,” said Elizabeth Gillam, head of EU government relations and public policy at Invesco, a fund firm with roughly $1.57trn in assets under management. She said there were “a couple of elements that we think could be improved when it comes to the taxonomy.” The first is “the sort of binary nature of the taxonomy, that you’re green or you’re not, which means that you’re both missing the shades of green, in terms of pure green to light green, but also everything that’s not green. You can have something that’s just shy of the technical definition to be green,” or green mixed in with a brown element, for example. Invesco would prefer “some form of traffic light system, where you could have a pure green definition, but also have a transition category, and potentially even a negative, brown category, so that clients can adapt that to their needs. [For] those who want that pure green definition, there’s a clear label for that. But those who have a more expansive definition or want to include transitioning, and only want to exclude that the worst offenders, can also do that.”
“The second issue that we’ve identified with the taxonomy is, as a global operator, we invest globally, we have teams operating around the world, and we service global clients. But the EU taxonomy is very focused on the EU market. There are lots of definitions that are very hard to apply outside of the EU,” commented Gillam.
Continued complexity
, partner and ESG services leader at the consultancy EY Luxembourg, called the debate over the taxonomy “extremely complex” and that it was a moving target. “There is a part that is already defined, there is some that is not yet,” she observed. The goal of harmonised definitions is broadly accepted, “so beyond the political debates... I think that from a financial industry perspective and investment perspective, I see a movement to adopt the taxonomy, even if it’s difficult because many, many players do not exactly know how to start with implementing it”.
With reporting by Marc Fassone